Conditional co-skewness and safe-haven currencies: A regime switching approach

We examine hedging benefits of safe-haven currencies in terms of currency co-skewness with the global stock market (covariance between currency return and global equity volatility) derived from a Markov regime switching model. Of the major currencies, the US dollar, the Japanese yen and the Swiss franc have positive currency co-skewness, providing a hedge against global stock volatility. Moreover, lower excess returns and associated lower interest rates on these currencies are partially attributable to their positive co-skewness because currency co-skewnesses are significantly priced with the expected negative risk premia. The co-skewness pricing effect remains robust even after allowance for time-varying or downside beta, volatility and skewness.